U.S.-China Trade War To Weigh On Zinc, Aluminium Prices, Says Vedanta

Vedanta Ltd. expects its zinc and aluminium businesses, which together contribute more than half to the mining conglomerate’s operating profit, to remain under pressure due to the U.S.-China trade war.

Prices of zinc—that fell 11 percent in the financial year ended March—are likely to decline further in the ongoing fiscal, the billionaire Anil Agarwal-led company said in its 2018-19 annual report. On the other hand, Vedanta expects aluminium prices to remain range-bound and sees no uptick. That’s also because of increase in aluminium production and smelter capacity in China.

Vedanta expects to lower the cost of production for zinc and aluminium this year.

The company aims to lower production cost of zinc by $1,000 a tonne in 2019-20. “De-bottlenecking and expansion of smelting capacity to maintain mines are expected to lead to higher production for this division,” Vedanta said in the report. It expects to increase zinc volume by 12 percent to 1 million tonne by March 2020.

For aluminium, Vedanta said increased bauxite sourcing, reduced dependence on imported alumina, improved volumes from alumina refinery, better coal availability, linkage and coal stock and efficient logistics would lower its production cost by 8-10 percent.

Oil & Gas

The company expects demand for oil and gas—which contributes around 30 percent to its operating profit—to increase in India even as it’s expected to stagnate globally due to the economic slowdown and U.S.-China trade war concerns.

Vedanta, which aims at producing 50 percent domestically, expects output to grow 6-16 percent this fiscal. It expects the Raageshwari Deep Gas facility to add 15,000 barrels of oil equivalent per day from the second quarter, which will help Vedanta meet its 200-220 thousand boepd guidance for FY20, according to the annual report.

Interest Coverage Ratio And EPS

Vedanta’s Debt-to-Ebitda ratio in 2018-19 came at higher than 1x for the first time since FY16. That’s mainly because of the acquisition of Electrosteel Steels Ltd.

Its interest coverage also slipped to 7.8 times due to lower operating profit and higher debt. The company’s earnings per share declined close to the levels seen in 2016, according to the report.

Capex At Five-Year High

Vedanta’s capital expenditure in the last fiscal was the highest in five years, mainly on account of a ramp up in production capacity of zinc and aluminium divisions, the report said.

The company also had a capex of $3.2 billion (Rs 22,268 crore) to expand volumes of its oil and gas division in the medium term. It has earmarked a capex of around Rs 9,700 crore for the upcoming financial year.

Vedanta’s free cash flows—cash a company produces through its operations, less the cost of expenditures on assets—have only started to improve this year.

Ratings agency Crisil Ltd. cautioned that huge capex requirement, along with higher dividend to parent Vedanta Resources Plc, may lead to significant cash leakages.